Chapter 14
Stationary-Source
Local Air Pollution
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Economics and Pollution Control
The Two Big Questions
1. What is the optimal level of pollution?
2. How should it be allocated among its
sources (firms)?
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How Do We Get There?
• Standards (command and control)



Set the overall standard at Q*
Calculate the amount of reduction necessary
Set uniform reduction goal for all firms
• Taxes/Emission Charges


Set the tax = externality cost at the optimum Q*
Firms will internalize the cost
• Tradable Permits (Coase)


Allocate right to pollute (Q*/N)
Allow firms to set price for trading permits
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Conventional Pollutants
The Command-and-Control Policy Framework
• Conventional or “criteria” pollutants are common
substances such as sulfur oxides, particulates,
carbon monoxide, ozone, nitrogen dioxide and
lead. They are thought to be dangerous only at
high concentrations.
• The historical approach to air pollution control has
been known as command-and-control approach
based on emissions standards.
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A Brief History of the US Experience
• 1955 Pollution Control Act

Primarily funded research into pollution issues
• 1967 Clean Air Act

Recommended standards

Onus on states to enact
• 1970 Clean Air Act Amendment

Set federal standards for primary (health) and
secondary (aesthetics, vegetation) ambient levels
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1970 Clean Air Act Amendment
• Primary Standards

National legal ceilings on ambient level of
pollutants

Health standard
• Minimum threshold such that there would be no
health effects
• Costs could not be considered

Best available control technology (BACT)
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TABLE 16.1 National Ambient AirQuality Standards (1 of 2)
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Cost-Effectiveness of the Command-and-Control
Approach
• Typically not cost-effective.

Ratio of CAC cost to least cost varied from 14:1 to 22:1 in
most cases (8 of 10)

CAC will be close to cost-effective only if a high degree of
control is necessary such that all sources are forced to abate
as much as is economically feasible.
• Sulfates in LA
• SO2 in Lower Delaware Valley
• While inefficient, CAC policies have resulted in better
air quality in developed countries.
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TABLE 14.2
Empirical Studies of Air Pollution Control
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TABLE 14.3 Trends in U.S. Emissions
and Air Quality
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Innovative Approaches
The Offset Program
• This program is acquired when a source
controls emission to a higher degree than
legally required.
• The policy allows qualified new or expanding
sources to emit pollution in a nonattainment
area, provided they acquire sufficient
emission reduction credits from existing
sources.
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The Effectiveness of This Early Application
• The emissions trading program has
substantially reduced the cost of complying
with the Clean Air Act. Transaction cost has
also increased.
• The initial allocation of permits has an effect
on the potential for price-setting behavior.
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Smog Trading
• State initiatives have also resulted in innovative
programs such as California’s Regional Clean Air
Incentives Market (RECLAIM).
• The 400 participating industry polluters under
RECLAIM receive an annual pollution limit, which
decreases by 5–8% annually for the next ten years.
Polluters are allowed to use flexible approaches
such as purchasing credits from other firms.
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Washington’ Clean Air Proposal
• Requires industries to limit greenhouse
emissions

Starts in 2012 – limits overall emissions to 1990
levels by 2012
• Continues to reduce emissions over time to half
• Each source limited to 25,000 metric tons of CO2

Establishes tradable permits
• 1 ton permits
• EcoNW estimates current pollution costs at
$3.8B

Health costs at $1.3B
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Emission Charges
• Economists usually suggest one of two types
of emissions charges.


An efficiency charge is set up to achieve an
efficient outcome by forcing the polluter to
compensate completely for all damage.
A cost-effective charge is designed to achieve
an ambient standard at the lowest possible cost.
• Emissions charges must be set by an
administrative process.
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Hazardous Pollutants
• The Clean Air Act requires the EPA to
frequently identify hazardous pollutants.
Once a substance is listed, the EPA has 180
days to regulate emissions. This requires
setting a national standard for the pollutant.
• The EPA has incorporated risk assessment
and benefit-cost analysis into their decisions.
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TABLE 16.4 Net Benefits ($Million/Year)
of Alternative Strategies for a Value of
Life Saved of $1 Million
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